Monopoly Master Set
Regulations that permit a regulated firm to cover its costs and to make a normal level of profit are commonly referred to as:
cost plus regulation
In the United States, price discrimination is ________.
permitted
o prevent this from happening, the Constitution of the United States specifies in Article I, Section 8:
"The Congress shall have Power . . . To Promote the Progress of Science and Useful Arts, by securing for limited Times to Authors and Inventors the Exclusive Right to their Writings and Discoveries."
The table below shows a monopolist's demand curve and the cost information for the production of its good. What will their profits equal?
$1,200
The following table shows a monopolist's demand curve and cost information for the production of its good. What price will it charge?
$15
Refer to the table below. This information reflects the demand curve and the average cost curve for a firm that is a natural monopoly. What will this firm's profits equal?
$2.50
The table below shows information reflecting the demand curve and long run average cost curve for a natural monopoly. If the firm chooses the level of output that maximizes profit, how much total profit will it be earning?
$2.50
If market share for six cleaning service companies are 8%, 10%, 6%, 3%, 25%, and 48%, what would be the Herfindahl-Herschman (HHI) index calculation?
3138
If two companies are seeking regulatory approval to merge their respective businesses, which of the following will most likely be the focus of the arguments that they will present in favor of the merger?
ALL
The two primary factors determining monopoly market power are the firm's A. revenues and size of its customer base B. demand curve and its cost structure C. variable cost curve and its fixed cost structure D. demand curve and level of wealth within its market
B. demand curve and its cost structure
If a firm holds a pure monopoly in the market and is able to sell 4 units of output at $2.00 per unit and 5 units of output at $1.75 per unit, it will produce and sell the fifth unit if its marginal cost is A. $1.75 or less B. $2.00 or less C. $0.75 or less D. $1.00 or less
C. $0.75 or less
4) Intellectual property
C. Implies ownership over an idea, concept, or image
For a monopolistic firm, the demand for its product is A. unitary elastic B. completely elastic C. completely inelastic D. neither b or c
C. completely inelastic
The form of legal protection intended to prevent reproduction of original works is referred to as ______________ law. A. patent B. trademark C. copyright D. trade secret
C. copyright
Which antitrust law would prohibit a merger between two firms that produce along the same value chain for a certain good?
Celler-Kefauver Act (the Celler-Kefauver Act extended the Clayton Act by restricting vertical and conglomerate mergers. Vertical mergers are between two companies producing different goods for one specific finished product. This gives more control over the value chain in the production process and could limit competition)
What is the reason behind why monopolies are allocatively inefficient?
Their price at the profit-maximizing level of output is greater than marginal cost. (If the price is greater than the marginal cost, society values the product more than its opportunity cost and then the monopoly could be producing more and increase efficiency.)
Allocative efficiency occurs when ________.
There is an optimal distribution of goods and services (This is because the price that consumers are willing to pay is equal to the marginal utility/benefit that they get and therefore there is not deadweight loss to society)
If a firm covers the cost of production for its product and also adds a 15% profit to the price it charges its customer, then this is considered ________.
cost-plus regulation (This describes the policy where the price charged by the monopoly corresponds to cost of production + 15%)
If a monopolist increases quantity sold by one unit, by now selling total output at a slightly lower price,
marginal revenue is lower than the new price for that extra unit sold.
What is one of the difficulties that emerges when the government uses price regulation? This can sometimes compromise ________.
market competition
Horizontal mergers are
mergers between companies that sell the same output, or the same type of product.
Conglomerate Mergers are
mergers between companies with unrelated outputs.
In some cases, barriers to entry may lead to
monopoly
restrictive practices:
practices that reduce competition but that do not involve outright agreements between firms to raise prices or to reduce the quantity produced
A firm can renew a trademark over and over again, as long as it
remains in active use.
If a monopolist increases quantity by one unit, but sells the increased output at a slightly lower price:
the marginal revenue curve must be below the demand curve
Setting the price too high will result in a low quantity sold, and
will not bring in much revenue.
According to this graph, what is the profit-maximizing quantity for this firm?
0
After AT&T was split up by government litigation into a number of different entities (i.e., local phone companies, a long-distance phone company, and a phone equipment manufacturer), what was the impact on competition in the phone market?
An increase in competition leading to greater innovation, more services, and lower prices.
By 2007, US market deregulation has proven to be most toxic to the overall health of the US economy in the ________________________ . A. telecommunications sector B. postal services sector C. banking sector D. nuclear power sector
C. banking sector
Which of the following is most unlikely to present a barrier to entry into a market? A. market forces B. patent laws C. technological advantages D. deregulation
D. deregulation
An early tool was the concentration ratio,
which measures what share of the total sales in the industry are accounted for by the largest firms, typically the top four to eight firms.
A water company has the monopoly in the water market and sells 7 units of output at $5.00 per unit and 8 units of output at $4.90 per unit. If the water company produces and sells the eighth unit, what must its marginal cost be? Hint: What is the marginal revenue of the eight unit of output?
$4.20 or less
Which are correct statements about natural monopolies?
1) Natural monopolies often arise in industries where the marginal cost of adding an additional customer is very low, once fixed costs are in place. 2) A natural monopoly occurs when the quantity demanded is less than the minimum quantity it takes to be at the bottom of the long-run average cost curve.
Which statements are true about marginal profit?
1) Total profit is maximized where marginal revenue equals marginal cost. 2) As long as marginal profit is positive, producing more output will increase total profits.
The table below shows a monopolist's demand curve and cost information for the production of its good. What quantity will it produce?
1,000
In the United States, exclusive patent rights last for
20 years
In the United States, a pharmaceutical company's exclusive patent rights last for
20 years.
If a firm holds a pure monopoly in the market and is able to sell 5 units of output at $4.00 per unit and 6 units of output at $3.90 per unit, it will produce and sell the sixth unit if its marginal cost is what? Hint: What is the marginal revenue of the sixth unit of output?
3.40 or less
Refer to the figure below. The profit maximizing quantity is:
30
The following table shows a power monopolist's demand curve and cost information for the production of its good. What quantity of output will the monopolist produce to maximize profit?
30
The table below gives information about the demand curve and the long-run average cost curve for an electric utility that is a natural monopoly. Using the information, what quantity of output will the firm produce if it wishes to maximize profit? Hint: Start by computing total revenue, total cost and total profit; then compute marginal revenue and marginal cost. What quantity of output will maximize profit? Both approaches should give the same answer.
300
Refer to the figure below. If the firm is producing the level of output which maximizes profit, its total variable cost of production is:
320
If market share for five cell phone service companies are 5%, 10%, 12%, 22%, and 51%, the Herfindahl-Herschman (HHI) index would be ________.
3354
Refer to the figure below. If the firm is producing the level of output that maximizes profit, its total cost of production is:
400
Refer to the figure below. If the firm is producing the level of output that maximizes profit, its total revenue is:
480
What is the total revenue of this firm if it is producing the level of output that maximizes profit?
480
Refer to the table below. The information pertains to the demand curve and the average cost curve for a natural monopoly firm. What will the price be in this market?
50
Refer to the figure below. Total profit is ________. (Hint: remember that profit is total revenue minus total cost.)
80
Consider an industry where six of the firms hold 5%, 9%, 9%, 14%, 21%, and 42% of the market share. Calculate the four firm concentration ratio.
86%
Copyright
A form of legal protection to prevent copying, for commercial purposes, original works of authorship, including books and music
Patent
A government rule that gives the inventor the exclusive legal right to make, use, or sell the invention for a limited time
trust
A group of corporations run by a single board of directors
When it comes to monopolists, why can price-discrimination be both more profitable and more efficient (i.e., produce greater net benefits for society)?
A higher quantity of output is produced in comparison to a single-price monopolist.
Describe the characteristics of a monopoly.
A monopoly occurs when a single firm supplies the whole market for some product. Because they face no direct competition, monopolies can charge any price they want and earn economic profits, even in the long run.
Which of the following are barriers to entry that are directly enforced by government?
A permit required to conduct business operations.
Which of the following examples is of a cost-plus regulation?
A power utility plant permitted to cover its costs and make a normal level of profit.
Which describes how a profit-maximizing monopoly chooses the quantity to produce?
A profit-maximizing monopoly should follow the rule of producing up to the quantity where marginal revenue is equal to marginal cost—that is, MR = MC.
Monopoly
A situation in which one firm produces all of the output in a market
In the United States, a pharmaceutical company's exclusive patent rights last for A. 20 years. B. 25 years. C. 10 years. D. 70 years.
A. 20 years.
3) Copyright
A. A form of protection for original works of authorship
__________________ law implies ownership over an idea or concept or image A. Intellectual property B. Copyright C. Patent D. Trademark
A. Intellectual property
A firm that holds a monopoly position in the market place is A. a price maker B. a price taker C. monopolistically competitive D. subject to infinite market forces
A. a price maker
Occasionally, _________________ may lead to pure monopoly; in other market conditions, they may limit competition _________________ . A. barriers to entry; to a few oligopoly firms B. barriers to entry; to a natural monopoly C. deregulation; requiring new patent law D. deregulation; requiring new copyright law
A. barriers to entry; to a few oligopoly firms
Copyright protection legislation provides protection for original works A. during the author's life plus 70 years B. during the author's life plus 20 years C. until the author is 70 years of age D. until the author is 75 years of age
A. during the author's life plus 70 years
If a monopolist increases quantity by one unit, but sells the increased output at a slightly lower price, A. marginal revenue is affected by adding one additional unit sold at the new price. B. all the previous units, which used to sell at a higher price, now sell for more. C. the marginal revenue of selling a unit is more than the price of the unit. D. because of higher output the marginal revenue curve is above the demand curve.
A. marginal revenue is affected by adding one additional unit sold at the new price.
A __________________ exists when the quantity demanded in the market is less than the quantity at the bottom of the long-run average cost curve. A. natural monopoly B. monopoly C. oligopoly D. monopolistic competition
A. natural monopoly
Roughly speaking, patent law covers __________ and __________ law protects an author's original books. A. original inventive creations; copyright B. trade secrets; trademark C. all inventions; trademark D. original audiovisual creations; copyright
A. original inventive creations; copyright
Following the assumption that firms maximize profits, how will the price and output policy of an unregulated monopolist compare with ideal market efficiency? A. output will be too small and its price too high. B. output will be too large and its price too high. C. output will be too small and its price too low. D. output will be too large and its price too low.
A. output will be too small and its price too high.
Government ______________ regulations specify that inventors will maintain exclusive legal rights to their respective inventions for ______________ . A. patent; a limited time B. trademark; an unlimited time C. copyright; a limited time D. trade secret; an unlimited time
A. patent; a limited time
The following figure shows the average cost curve, demand curve, and marginal revenue curve for a monopolist. After maximizing profits, what do the firm's costs equal? A. the area of rectangle ABGH B. the area of rectangle BDEG C. the area of rectangle ACFH D. the area of rectangle ADEH
A. the area of rectangle ABGH
When the demand for a good or service limits the quantity that can be sold to an output at which the firm experiences economies of scale, A. the firm is a natural monopoly. B. there are close substitutes for the good the firm produces. C. firm is a single-price monopoly. D. firm is well protected from competition by a legal barrier.
A. the firm is a natural monopoly.
For a pure monopoly to exist, A. there is a single seller in a particular industry B. there is only one seller, therefore no industry C. there are a few sellers in a given industry D. there are limited sellers in a particular industry
A. there is a single seller in a particular industry
Explain why a monopoly is inefficient.
Allocative inefficiency occurs when firms produce less than the optimal supply, which monopolies do to allow them to charge a higher price. Deadweight loss is the loss in total surplus (producer + consumer surplus) that occurs at output less than the optimal one.
Celler-Kefauver Act (1950)
Amends Clayton Act by prohibiting mergers where there is purchase of ASSETS of a firm.
Trademark
An identifying symbol or name for a particular good and can only be used by the firm that registered that trademark
DeBeers controlled 80% of the diamond business through the mid 20th century. After other mines were discovered in Canada, Russia, and Australia ended DeBeers' monopoly and its control of the industry is now down to 40%. What was the impact on the diamond market when competition moved into the market?
An increase in competition lead to greater innovation, more variety, and lower prices.
________ give government the power to block certain mergers, and in some cases, to break up large firms into smaller ones.
Antitrust laws
If a firm holds a pure monopoly in the market and is able to sell 5 units of output at $4.00 per unit and 6 units of output at $3,90 per unit, it will produce and sell the sixth unit if its marginal cost is A. $3.90 or less B. $3.40 or less C. $3.50 or less D. $4.00 or less
B. $3.40 or less
The US government has registered ___________________ on behalf of business firms to protect a particularly distinct element each has selected for its ability to aid consumers to easily __________________ . A. 200,00 patents; license for use B. 800,000 trademarks; identify the source of goods C. 1 million copyright licenses; identify the authors of creative works D. 200,000 trade secrets; create a natural monopoly
B. 800,000 trademarks; identify the source of goods
2) Trademark
B. An identifying symbol or name for a particular good
_____________ and __________________ refer to the quantity and price at a point in time. A. Monopoly; productive efficiency B. Productive; allocative efficiency C. Monopoly; allocative efficiency D. Profit; maximization
B. Productive; allocative efficiency
The marginal revenue curve for a monopolist ____________________ the market demand curve. A. always rises above B. always lies beneath C. always runs parallel D. always is the same
B. always lies beneath
Once I'MaPharmaCo. has received confirmation of the registration for its latest drug patent application, it will have created a monopoly for that product by restricting A. demand for the product. B. entry into the market. C. amount of product advertising. D. the number of product compliments.
B. entry into the market.
A natural monopoly occurs when the quantity demanded is ________ the minimum quantity it takes to be at the bottom of the long-run average cost curve.
B. less than
Which of the following is most likely to be a monopoly? A. local fast-food restaurant B. local electricity distributor C. local bathroom fixtures shop D. local television broadcaster
B. local electricity distributor
Deregulation occurs when a government eliminates or scales back rules relating to all but one of the following. Which one is it? A. prices that can be charged B. natural monopoly C. conditions of entry in a certain industry D. quantities that can be produced
B. natural monopoly
A monopolist is able to maximize its profits by A. setting the price at the level that will maximize its per-unit profit. B. producing output where MR = MC and charging a price along the demand curve. C. setting output at MR = MC and setting price at the demand curve's highest point. D. producing maximum output where price is equal to its marginal cost.
B. producing output where MR = MC and charging a price along the demand curve.
In the event that Only1Corp. obtains control of all the natural gas producers in the US, it would most likely A. have a patent giving it exclusive legal rights to make, use, and sell for a limited time. B. raise prices, cut production, and realize positive economic profits. C. have legal protection to prevent copying its methods of production for commercial use. D. acquire rights for its investors to produce and sell their product.
B. raise prices, cut production, and realize positive economic profits.
What qualities would ideally suit a monopolistic firm with regard to barriers to entry? A. a few impediments to limit new firms from operating and expanding within the market B. sufficient strength to prevent or discourage potential competitors from entering the market C. government rules on prices, quantities, or conditions of entry in an industry D. government regulations that provide no barriers to entry, exit, or competition
B. sufficient strength to prevent or discourage potential competitors from entering the market
If it was possible for one company to gain ownership control all of the uranium processing plants in the US, then A. they will strive to reach efficiencies only they know how to make. B. that firm could set up barriers to entry to discourage competition. C. government will deregulate to ensure the company's monopoly. D. the factors of market demand and supply will set the price.
B. that firm could set up barriers to entry to discourage competition.
The following figure shows the average cost curve, demand curve, and marginal revenue curve for a monopolist. After maximizing profits, what do the firm's profit's equal? A. the area of rectangle ABGH B. the area of rectangle BDEG C. the area of rectangle BCFG D. the area of rectangle ADEH
B. the area of rectangle BDEG
The following graph shows the demand curve for a good and the long run average cost curve for a typical firm in this market. If the government does not intervene in the market, then A. there will be many firms in this market, all of whom will take the market price as given and produce where price equals marginal cost B. there will only be 1 firm in this market, and they will produce where marginal revenue equals marginal cost C. there will only be 1 firm in this market, and they will take the price as given and produce where price equals marginal cost D. no firms will enter this market
B. there will only be 1 firm in this market, and they will produce where marginal revenue equals marginal cost
Which of the following denotes the typical shape of the monopolist's total cost curve? A. total costs decrease and become flatter as output rises B. total costs rise and grow steeper as output rises C. higher output levels create the typical downward sloping cost curve D. total costs are typically constant and are shown by a straight horizontal line
B. total costs rise and grow steeper as output rises
Explain the sources of barriers to entry
Barriers to entry are economic or legal prohibitions on other firms entering an industry to capture some of the monopoly's profits.
Which one of the following is the most accurate description of a monopolist? A. a sole producer of a narrowly defined product class, such as brown, Grade A eggs produced in Eagle County, Colorado B. a firm that is very large relative to all its competitors within a narrow product class C. a sole producer of a product for which good substitutes are lacking in a market with high barriers to entry D. a large, multinational firm that produces a single product in a narrow product class
C. a sole producer of a product for which good substitutes are lacking in a market with high barriers to entry
When J.K. Rowling exerts copyright ownership of her literary works, she creates a monopoly by restricting A. the number of inventors. B. unit production costs. C. entry into the market. D. demand for the product.
C. entry into the market.
The demand curve perceived by a perfectly competitive firm A. shows that such a firm is a price-maker B. shows economies of scale over a large range of output C. is horizontal D. all of the above
C. is horizontal
The largest cattle rancher in a given region will be unable to have a __________ when sufficient numbers of smaller cattle ranchers provide sources of competition. A. oligopoly B. patent C. monopoly D. monopolistic competition
C. monopoly
The use of sharp, temporary price cuts as a form of _________________ would enable traditional US automakers to discourage new competition from smaller electric car manufacturers. A. natural monopoly B. monopolistic competition C. predatory pricing D. oligopolistic competition
C. predatory pricing
Which of the following will present the least amount of concern to a firm that has a monopoly over a particular industry? A. whether consumers will purchase its product B. whether consumers will spend on different products C. the competitive actions of other business firms D. barriers to entry and competitors' patent protection
C. the competitive actions of other business firms
When a firm pursues a predatory pricing strategy, it does so A. to hire more staff to lower unemployment. B. to increase supply to benefit consumers. C. to maximize profits in the long run. D. to discourage short run competition.
C. to maximize profits in the long run
In the business world, a _________________ is recognized as a legally acceptable way for any business to keep knowledge of its particular methods of production from being known by competing firms. A. patent B. monopoly C. trade secret D. trademark
C. trade secret
What was an early tool used by regulators to measure the degree of monopoly power in an industry?
Concentration Ratio (Concentration ratios were used to measure the degree of market or monopoly power in an industry)
Which legal protection form is intended to prevent reproduction of original works?
Copyright Law (Copyright laws prevent reproduction of original work without owner's authorization. You could not sing Beyonce's songs and profit from them without her authorization and probably paying for them.)
Which competition policy requires a firm to tightly control its costs to protect its profits?
Cost-Plus Regulation (Price cap regulation is when the regulator sets a price that the firm can charge over the next few years. If the firm can find ways of reducing its costs more quickly than the price caps, it can make a high level of profits. However, if the firm cannot keep up with the price caps or suffers bad luck in the market, it may suffer losses. This policy requires delicacy. It will not work if the price regulators set the price cap unrealistically low. It may not work if the market changes dramatically so that the firm is doomed to incurring losses no matter what it does.)
Say the government places a regulation on a natural monopolist so that for its product it can only set its price so high, e.g. a price ceiling. What is this type of regulation called?
Cost-Plus regulation (wrong)
Say the town of Manchester has regulated its water utility so that it covers the cost of its production for its water and also adds a 20% profit to the price it charges its customer. What would this regulation example be considered?
Cost-plus regulation
Calculate and graph a monopoly's fixed, variable, average, marginal and total costs.
Costs are computed and cost curves graphed the same way as in perfect competition. This is one of the similarities across market structures.
1) Patent
D. Gives the inventor the exclusive legal right to make, use, or sell the invention for a limited time
If monopolists are able to produce fewer goods and sell them at a higher price than they could under perfect competition, the result will be A. elimination of barriers to entry B. irregularly high unsustainable profits. C. government deregulation. D. abnormally high sustained profits.
D. abnormally high sustained profits.
The typical pattern of costs for a monopoly can be analyzed by using: I) total cost II) fixed cost III) variable cost IV) marginal cost V) average cost VI) average variable cost A. I, II, and III B. I, III and IV C. I, II, III, IV, and VI D. all of the above
D. all of the above
The typical pattern of costs for a perfectly competitive firm can be analyzed by using: I) total cost II) fixed cost III) variable cost IV) marginal cost V) average cost VI) average variable cost A. I, II, and III B. I, III and IV C. I, II, III, IV, and VI D. all of the above
D. all of the above
The US laws dealing with original works of authorship allow the US Copyright Office to enforce protection for all but one of the following. Which one is it? A. contemporary sculptures B. contemporary paintings C. pantomimic works D. ancient Bible texts
D. ancient Bible texts
Intellectual property law is a body of law that includes A. the right of inventors to produce their inventions B. the right of inventors to sell their inventions C. trademark, patent and trade secret legislation D. copyright legislation, as well as all of the above
D. copyright legislation, as well as all of the above
The slope of the demand curve for a monopoly firm is A. horizontal, parallel to the x-axis B. vertical, parallel to the y-axis C. upward sloping D. downward sloping
D. downward sloping
If the North American newsprint paper market has barriers to entry, then A. abnormally high profits will attract the entry of new firms. B. the entry of new firms will eventually cause price to decline. C. surviving firms earn only a normal level of profit in the long run. D. entry will be blocked even if firms are earning high profits.
D. entry will be blocked even if firms are earning high profits.
When a monopolist increases sales by one unit, A. it gains some marginal revenue from selling that extra unit. B. more low priced sales cause negative marginal revenues. C. every other unit must now be sold at a lower price. D. it loses some marginal revenue and all of the above.
D. it loses some marginal revenue and all of the above.
When a natural monopoly exists in a given industry, the per-unit costs of production will be A. lowest when there are a large number of producers in the industry. B. lower for the smaller firms than for larger firms. C. minimized at the output that maximizes the industry's profitability. D. lowest when a single firm generates the entire output of the industry.
D. lowest when a single firm generates the entire output of the industry.
The total revenue curve for a monopolist will A. start high, rise, and then decline. B. start low, decline, and then rise. C. start high, decline, and then rise. D. start low, rise, and then decline.
D. start low, rise, and then decline.
The total revenue curve for a monopolist will ________.
D. start low, rise, and then decline.
The following figure shows the average cost curve, demand curve, and marginal revenue curve for a monopolist. After maximizing profits, what does the firm's revenue equal? A. the area of rectangle ABGH B. the area of rectangle BDEG C. the area of rectangle BCFG D. the area of rectangle ADEH
D. the area of rectangle ADEH
The figure below shows the demand curve and the long run average cost curve for an electric company. This market is a natural monopoly because A. the long run average cost curve is U-shaped B. when producing large quantities, the long run average cost is greater than demand C. when producing small quantities, the demand is higher than long run average cost D. the demand curve intersects the long run average cost curve at a point where the long run average cost curve is downward sloping
D. the demand curve intersects the long run average cost curve at a point where the long run average cost curve is downward sloping
One response to the Great Recession was to pass the ________, which attempted to make reforms to the financial system.
Dodd-Frank Act (The Dodd-Frank act was designed to restore confidence in the financial institutions.)
5) Trade secret
E. Information that is kept private by the company
Natural Monopoly
Economic conditions in the industry, for example, economies of scale or control of a critical resource, that limit effective competition
What are conditions conducive to a natural monopoly?
Extensive economies of scale (Economies of scale means that the cost of production per unit falls as the firm increases production and leads to natural monopolies because one large firm can produce at lower cost than several smaller ones.)
How can a monopolist maximize its profits?
Finding the output where MR = MC and producing and charging the price corresponding to that output level on the demand curve.
Sherman Antitrust Act (1890)
First federal action against monopolies, it was signed into law by Harrison and was extensively used by Theodore Roosevelt for trust-busting. However, it was initially misused against labor unions
Three things are necessary for effective price discrimination.
First, the firm needs to have at least some market power. If it has no market power, then it can't charge different prices for different customers. Second, the firm needs to be able to sort the customers into those willing to pay a higher price and those who are no, but who would be willing to pay a lower price. Identifying these groups of customers is difficult, since customers don't usually wear signs to that effect. Often firms create a situation where customers reveal themselves. Why do movie theaters charge lower prices for matinees (i.e showings before evening?) The answer is because usually it's young people and retired people who go to matinees because they don't have the money to pay full price. Why don't other adults go to matinees? The answer is because they tend to work during the day (or have other things to do during weekend days). The last thing necessary for price discrimination is the inability for customers to resell the product.
Which of the following is true regarding legal monopolies?
Government allows barriers to entry to limit competition (This is a type of monopoly where laws prohibit (or severely limit) competition
Analyze different strategies to control monopolies.
Governments use laws and regulation to reduce the inefficiency of monopolies. Regulated monopolies supply more than they otherwise would in return for a guaranteed profit.
Allocative efficiency, the optimal quantity of some output, is benefited by price discrimination for a monopolist by ________.
Greater Profits (the benefit of price discrimination to the monopolist is greater profits, of course, but it also increase productive and allocative efficiency because more produced is produced and is made available to a greater market than would otherwise be provided by the monopoly. As a result, more people can afford to buy the good in question and a greater level of allocative efficiency is achieved.)
Which of the following are considered barriers to entry?
Heavy spend on advertising by established companies
Which of the following are considered barriers to entry?
Heavy spending on advertising by established companies. (Name recognition and image can be a barrier. For examples, it would be very expensive to compete with firms like Apple, Microsoft or Amazon.)
What is price discrimination?
It is defined as charging different prices to different customers for the same product.
What does it mean when a firm uses a trademark as a legal monopoly?
It is using an identifiable name or symbol. (A firm can register a name or symbol for their sole use such as the apple for Apple, the golden arches for Mcdonald.)
Which of the following explanations captures the role the U.S. government plays in regard to competition in the marketplace?
It prohibits contracts restricting competition and identifies anticompetitive behavior.
If Congress reduced the period of patent protection from 20 years to 10 years, what would likely happen to the amount of private research and development?
It would make innovation less lucrative, so the amount of research and development would likely decline.
Legal Monopoly
Legal prohibitions against competition, such as regulated monopolies and intellectual property protection
Sarbanes-Oxley Act:
Legislation designed to increase confidence in financial information provided by public corporations to protect investors from accounting fraud
If a monopolist increases quantity by one unit, but sells the increased output at a slightly lower price:
Marginal revenue is affected by adding one additional unit sold at the new price
What do antitrust laws help guard against?
Mergers that have the potential to hurt consumers.
Trade Secrets
Methods of production kept secret by the producing firm
The profit-maximizing quantity will occur where Marginal Revenue equals Marginal Cost (MR = MC) in which type of firms?
Monopolies and perfectly competitive firms
Which of the following is true of the monopoly structure?
Monopolies tend to generate high profits, have high barriers to entry, and not have significant competition
What is true of monopolies?
Monopolists will earn the highest profit at the point where total revenue is farthest above total cost.
The following figure shows the average cost curve, demand curve, and marginal revenue curve for a monopolist. After maximizing profits, what does the firm's revenue equal?
NOT CORRECT: the area of rectangle BCFG
The following figure shows the average cost curve, demand curve, and marginal revenue curve for a monopolist. After maximizing profits, what do the firm's costs equal?
NOT: the area of rectangle ACFH
The following graph shows the demand curve for a good and the long run average cost curve for a typical firm in this market. If the government does not intervene in the market, then
NOT: there will only be 1 firm in this market, and they will take the price as given and produce where price equals marginal cost
Clayton Antitrust Act (1914)
New antitrust legislation constructed to remedy deficiencies of the Sherman Antitrust Act, namely, it's effectiveness against labor unions
________ is a type of barrier to entry that intimidates potential competition by deterring them from entering the market.
Predatory Pricing (This is when an existing firm uses sharp but temporary price cuts to discourage new competition. It is illegal but hard to prove and prosecute)
When the regulator sets a price that a firm cannot exceed over the next few years, the regulator is enforcing ________.
Price Cap Regulation
Monopolies are inefficient when it comes to allocative efficiency because ________.
Price is always greater than marginal cost (The allocative efficient quantity of output, or the socially optimal quantity, is where the demand equals marginal cost, but the monopoly will not produce at this point. Instead, a monopoly produces too little output at too high a cost, resulting in deadweight loss.
Marginal Profit
Profit of one more unit of output, computed as marginal revenue minus marginal cost
The data below relate to a monopolist and the product it produces. What is the profit-maximizing output and price for this monopolist?
Q=2 : P=$18 (wrong)
The data below relate to a monopolist and the product it produces. If the firm wants to maximize profit, what output and price will it choose?
Q=4 : P=$14
If an economist is talking about bundling, predatory pricing or tying sales they are talking about ________.
Restrictive practices (The practices are designed to undermine or restrict competition.)
Which of the following acts was designed to protect investors from accounting fraud and increase the public's' confidence in the financial information disclosed by public corporations.
Sarbanes-Oxley Act:
A utility for water is a natural monopoly in the local market. What is the optimal action to take when looking at keeping a competition policy for the water utility?
Set the price where AC crosses the demand curve.
Which is not one of the forces that discourage or prevent potential competitors from entering a market, also know as a barrier to entry?
Sociological
Intellectual Property
The body of law including patents, trademarks, copyrights, and trade secret law that protect the right of inventors to produce and sell their inventions
Barriers to Entry
The legal, technological, or market forces that may discourage or prevent potential competitors from entering a market
What is a basic difficulty that is faced when dealing with a natural monopoly and trying to maintain a competition policy?
The natural monopoly structure makes competition not likely or very costly. (A natural monopoly has lower cost per unit than smaller firms and therefore discourages competition.)
Company X and company Z are planning to merge their business into one and are seeking regulatory approval. What is the most likely reasoning X & Z will use and present to support their planned merger?
The newly created firm is able to take advantage of economies of scale.
If you were to compare an ideal market efficiency with an unregulated monopolist. Assuming that firms maximize profits, how will the monopoly price and output policy compare?
The price will be too high and output too small.
The R.C.Willey furniture store has a sale for Memorial day weekend that if you purchase products that come over $499 a 60" TV can be purchased for only $300. This sales practice is known as ________.
Tying sales
________ happens when a customer is required to buy product #2 in order to be able to buy product #1.
Tying sales
Which of the following are considered examples of monopolies?
U.S. postal service (The US postal service has a legal monopoly on the delivery of first class mail and is the only company in this market and therefore a monopoly.)
Which of the following are considered examples of monopolies?
US postal services electric utility companies
When does price discrimination take place?
When a business can charge different prices to different customers based on their willingness to pay. (Firms can charge different prices for the same product because customers do not all have the same willingness to pay. The more willing, the higher the price.)
Economies of Scale
When a firm faces decreasing long run average costs as its level of output increases
Predatory Pricing
When an existing firm uses sharp but temporary price cuts to discourage new competition
Cost-Plus Regulation
When regulators permit a regulated firm to cover its costs and to make a normal level of profit
When does allocative efficiency take place?
When the ideal quantities of goods and services are produced.
Regulatory Capture
When the supposedly regulated firms end up playing a large role in setting the regulations that they will follow and as a result, they "capture" the people usually through the promise of a job in that "regulated" industry once their term in government has ended
Which is the profit-maximizing level of output for a monopoly?
Where marginal revenue is equal to marginal cost.
If P > MC, then the marginal benefit to society (as measured by P) is greater than the marginal cost to society of producing additional units, and
a greater quantity should be produced.
Because of the perceived downward sloping nature of a monopolist's demand curve, the monopolist will charge a relatively low price at ________
a high level of output
While a monopoly, by definition, refers to a single firm, in practice the term is often used to describe
a market in which one firm merely has a very high market share.
A firm that holds a monopoly position in the market place is
a price maker
Bundling
a situation in which multiple products are sold as one
Tying Sales
a situation where a customer is allowed to buy one product only if the customer also buys another product
If monopolists are able to produce fewer goods and sell them at a higher price than they could under perfect competition, the result will be
abnormally high sustained profits.
The four-firm concentration ratio is calculated by
adding the market shares of the four largest firms:
The Federal Trade Commission and the U.S. Department of Justice prohibit firms from
agreeing to fix prices or output, rigging bids, or sharing or dividing markets by allocating customers, suppliers, territories, or lines of commerce.
Which of the following are characteristics of a monopoly?
all
The typical pattern of costs for a monopoly can be analyzed by using: I) total cost II) fixed cost III) variable cost IV) marginal cost V) average cost VI) average variable cost
all of the above
Most mergers actually benefit competition and consumers by
allowing firms to operate more efficiently."
The marginal revenue curve for a monopolist ____________________ the market demand curve.
always lies beneath
Exclusive Dealing
an agreement that a dealer will sell only products from one manufacturer
minimum resale price maintenance agreement:
an agreement that requires a dealer who buys from a manufacturer to sell for at least a certain minimum price
Concentration Ratio
an early tool to measure the degree of monopoly power in an industry; measures what share of the total sales in the industry are accounted for by the largest firms, typically the top four to eight firms
A trademark is an example of a legal monopoly. It means ________.
an identifying symbol or name
After AT&T was split up by government litigation into a number of different entities (i.e., local phone companies, a long-distance phone company and a phone equipment manufacturer), what was the impact on competition in the phone market?
an increase in competition leading to greater innovation, more services, and lower prices
However, both mergers and acquisitions lead to two formerly separate firms being under common ownership,
and so they are commonly grouped together.
Thus, in markets with significant barriers to entry, it is not true that abnormally high profits will attract new firms,
and that this entry of new firms will eventually cause the price to decline so that surviving firms earn only a normal level of profit in the long run.
________ give government the power to block certain mergers, and in some cases, to break up large firms into smaller ones.
antitrust laws
What gives government the leverage it needs to occasionally partition large business into smaller firms and block certain mergers?
antitrust laws (Antitrust laws allow the government to block mergers and break apart large businesses.)
Herfindahl-Hirschman Index (HHI)
approach to measuring market concentration by adding the square of the market share of each firm in the industry
Due to the perceived nature of a monopolist's demand curve, the monopolist can charge a relatively high price
at a low level of output
A natural monopoly arises when
average costs are declining over the range of production that satisfies market demand.
QUIZ: Occasionally, _________________ may lead to pure monopoly; in other market conditions, they may limit competition _________________ .
barriers to entry; to a few oligopoly firms
This concentration ratio would not be considered especially high,
because the largest four firms have less than half the market.
A natural monopoly poses a difficult challenge for competition policy,
because the structure of costs and demand seems to make competition unlikely or costly.
The marginal revenue curve for a monopolist always lies
beneath the market demand curve.
copyright protects
books, songs, and art.
There are ongoing negotiations, both through the World Intellectual Property Organization (WIPO) and through international treaties, to
bring greater harmony to the intellectual property laws of different countries to determine the extent to which patents and copyrights in one country will be respected in other countries.
As a result, a monopoly is not a price taker like a perfectly competitive firm, but instead it has the power to choose its market price.
but instead it has the power to choose its market price.
Predatory pricing is a violation of U.S. antitrust law,
but it is difficult to prove.
Selling more output raises revenue,
but lowering price reduces it.
The idea is to provide limited monopoly power so that innovative firms can recoup their investment in R&D,
but then to allow other firms to produce the product more cheaply once the patent expires.
Second, the firm needs to be able to sort the customers into those willing to pay a higher price and those who are no,
but who would be willing to pay a lower price.
If the marginal revenue is higher than marginal cost, then a monopoly can increase profit
by producing one more unit of output.
For some products, the government erects barriers to entry
by prohibiting or limiting competition.
MC=
change in total cost/change in quantity producedchange in total cost
MR=
change in total revenue/change in quantity sold
Price Discrimination
charging different prices to different customers for the same product.
Even if a company does not have a patent on an invention,
competing firms are not allowed to steal their secrets
The form of legal protection intended to prevent reproduction of original works is referred to as ________ law.
copyright
Intellectual property law is a body of law that includes
copyright legislation, as well as all of the above
If a sewage utility is permitted to cover its fixed and variable costs and to make a normal level of profit it is commonly referred to as ________.
cost plus regulation
The two primary factors determining monopoly market power are the firm's
demand curve and its cost structure
Which of the following is least likely to present a barrier to entry into a market?
deregulation
A natural monopoly can also arise in smaller local markets for products that are
difficult to transport.
The slope of the demand curve for a monopoly firm is
downward sloping
A monopoly sees the demand curve as ________ while a perfectly competitive firm perceives its demand curve as ________.
downward sloping; horizontal
Because the monopolist is the only firm in the market, its demand curve
downward-sloping
A monopoly's demand curve is
downward-sloping. (Since the monopoly is the sole firm in the market, the demand for the monopoly's product is the same as the market demand and is downward sloping like a typical market demand.)
Natural Monopoly
economic conditions in the industry, for example, economies of scale, that limit effective competition
A natural monopoly is likely to emerge under which conditions
economies of scale
An example of a natural monopoly is a(n) ________ because the infrastructure has already been built so the marginal cost is relatively low.
electric company
Indeed, some mergers create a concentrated market, while others
enable a single firm to raise prices."
It is legal if the purpose of the contract is to
encourage competition between dealers.
In the United States, price discrimination is ________.
encouraged (incorrect) maybe its permitted
When J.K. Rowling exerts copyright ownership of her literary works, she creates a monopoly by restricting
entry into the market.
If the North American newspaper market has barriers to entry, then
entry will be blocked even if firms are earning high profits.
If the North American newsprint paper market has barriers to entry, then
entry will be blocked even if firms are earning high profits.
Private firms generally have the freedom to:
expand or reduce production set the price they choose open new factories or sales facilities or close them hire workers or to lay them off start selling new products or stop selling existing ones
City Gas is a natural monopoly that supplies natural gas to a particular city. Its cost and demand information are given below. If the government decides to regulate this natural monopoly by forcing them to produce at the point where the demand curve intersects average cost, then compared to the unregulated natural monopoly, the price will ________ and the quantity will ________.
fall, rise
Price discrimination occurs when a:
firm charges a different price for the same product based on demand differences
Price discrimination occurs when a
firm charges different prices to different customers based on their willingness to pay.
A perfectly competitive demand curve is considered to be ________ while a monopoly demand curve is considered to be ________.
flat; downward-sloping (A perfectly competitive firm perceives the demand curve that it faces to be flat. The flat shape means that the firm can sell either a low quantity or a high quantity at exactly the same price. A monopolist perceives the demand curve that it faces to be the same as the market demand curve, which for most goods is downward-sloping. Thus, if the monopolist chooses a high level of output, it can charge only a relatively low price; conversely, if the monopolist chooses a low level of output , it can then charge a higher price. The challenge for the monopolist is to choose the combination of price and quantity that maximizes profits.)
Copyright protection ordinarily lasts
for the life of the author plus 70 years.
Barriers may block entry even if the
form or firms currently in the market are earning profits
The effectiveness of price regulation and antitrust policy is rooted in allowing fair competition yet can ________.
have unintended consequences (All market-based economies operate against a background of laws and regulations, including laws about enforcing contracts, collecting taxes, and protecting health and the environment. The government policies discussed in this module-like blocking certain anticompetitive mergers, ending restrictive practices, imposing price cap regulation on natural monopolies, and deregulation-demonstrate the role of government to strengthen the incentives that come with a greater degree of competition.)
Some [mergers] are likely to lessen competition. That, in turn, can lead to
higher prices, reduced availability of goods or services, lower quality of products, and less innovation.
A narrowly defined market will tend to make concentration appear
higher,
When considering a competition policy for a natural monopoly, doing nothing will ________.
increase cost (wrong)
Because of the downward sloping demand curve, a monopolist can increase its revenue is by ________.
increasing or decreasing price of its good.
Select the option that represents the lowest barrier to entry in a market?
innovation and technology (wrong)
Vertical mergers are
input-output mergers, in which a company buys out another company that would be involved in the production of a good.
Roughly speaking, patent law covers
inventions
The Herfindahl-Herschman (HHI) index
is the sum of the square of market shares.
Since a monopoly faces no significant competition,
it can charge any price it wishes
Since a merger combines two firms into one,
it can reduce the extent of competition between firms.
When a monopolist increases sales by one unit,
it loses some marginal revenue and all of the above.
Suppose demand for a monopoly's product falls so that its profit-maximizing price is below average variable cost. How much output should the firm supply? (Hint: draw the graph and identify the break-even and shutdown points.)
it should shutdown and not produce output
Conversely, setting the price too low may result in a high quantity sold, but because of the low price,
it will not bring in much revenue either.
If Congress reduced the period of patent protection from 20 years to 10 years, what would likely happen to the amount of private research and development?
it would make innovation less lucrative, so the amount of research and development would likely decline.
A minimum price contract is illegal because
it would restrict competition among dealers.
Antitrust Laws
laws that give government the power to block certain mergers, and even in some cases to break up large firms into smaller ones
Dodd-Frank Act
legislation designed to protect consumers and end bailouts to lead to greater economic stability
In other cases, they may
limit competition to a few firms
Economies of scale can combine with the size of the market to
limit competition.
For a pure monopoly to exist there is/are:
limited sellers in a particular industry. (wrong)
A copyright is a form of protection for works including
literary, dramatic, musical, architectural, cartographic, choreographic, pantomimic, pictorial, graphic, sculptural, and audiovisual creations."
Which of the following is most likely to be a monopoly?
local electricity distributor
A monopolist is a price-
maker
A monopolist can determine its profit-maximizing price and quantity by analyzing the marginal revenue and marginal costs of producing an extra unit. If the marginal cost curve is upwardly sloping and the marginal revenue curve is downward-sloping then it should following the ________ for profit maximizing.
marginal principle (For a monopoly marginal revenue decreases as it sells additional units of output. The marginal cost curve is upward-sloping. the profit-maximizing choice for the monopoly will be to produce at the quantity where marginal revenue is equal to marginal cost: that is, MR=MC. If the monopoly produces a lower quantity, then MR>MC at those levels of output, and the firm can make higher profits by expanding output. If the firm produces at a greater quantity, then MC>MR, and the firm can make higher profits by reducing its quantity of output.)
Total profit is maximized where
marginal revenue equals marginal cost.
The largest cattle rancher in a given region will be unable to have a ________ when sufficient numbers of smaller cattle ranchers provide sources of competition.
monopoly
In general, if a firm produces a product without close substitutes, then the firm can be considered a
monopoly producer in a single market.
By reducing the deadweight loss of social surplus price discrimination is
more allocatively efficient.
A/an ________ monopoly occurs when the scale economies in production or control of natural resources are so large or strong that only one firm can make a profit in that industry.
natural (A natural monopoly occurs where the economics of an industry naturally lead to a single firm dominating the industry. Economies of scale and sole ownership (or control) of a natural resource are two common examples of natural monopoly
There are two main types of monopolies that differ in they ways they exploit barriers of entry:
natural monopolies and legal monopolies.
A ________ exists when the quantity demanded in the market is less than the quantity at the bottom of the long-run average cost curve.
natural monopoly
A __________________ exists when the quantity demanded in the market is less than the quantity at the bottom of the long-run average cost curve.
natural monopoly
Economies of scale and sole ownership (or control) of a natural resource are two common examples of
natural monopoly.
Another type of natural monopoly occurs when a company has sole ownership (or majority control) of a scarce physical resource for which there are
no close substitutes.
But if buyers have a range of similar—even if not identical—options available from other firms, then the firm is
not a monopoly.
These industries offer an example where, because of economies of scale, one producer can serve the entire market more efficiently than a
number of smaller producers that would need to make duplicate physical capital investments.
Mono means
one
Roughly speaking, patent law covers __________ and __________ law protects an author's original books.
original inventive creations; copyright
In other words, total costs increase with
output at an increasing rate.
Following the assumption that firms maximize profits, how will the price and output policy of an unregulated monopolist compare with ideal market efficiency?
output will be too small and its price too high
Following the assumption that firms maximize profits, how will the price and output policy of an unregulated monopolist compare with ideal market efficiency?
output will be too small and its price too high.
If a legal monopoly owns the exclusive rights to a good for 20 years, it has a ________ for that good.
patent
Government ______________ regulations specify that inventors will maintain exclusive legal rights to their respective inventions for ______________ .
patent; a limited time
Examples of intellectual property rights provided to legal monopolies include
patents, trademarks, and trade secret law (Taken together, this combination of patents, trademarks, copyrights, and trade secret law is called intellectual property, because it implies ownership over an idea, concept, or image, not a physical piece of property like a house or a car. Countries around the world have enacted laws to protect intellectual property, although the time periods and exact provision of such laws vary across countries.)
No one can reproduce, display, or perform a copyrighted work without
permission of the author.
A new skateboard company, "Sk8ters" opens its doors across the street from the town's existing skateboard company "Skate House". Skate House has a big clearance sale that lasts for four month and drastically undercuts its prices. After four months of dismal sales Sk8ters closes its doors unable to sell its products or compete with Skate House's prices. In the fifth month Skate House raises its prices back to regular prices. This is an example of what type of restrictive practice?
predatory pricing
Which of the following statements is true about price discrimination In the United States.
price discrimination is permitted
However, in the case of monopoly, at the profit-maximizing level of output,
price is always greater than marginal cost.
Why is a monopoly allocatively inefficient?
price is greater than marginal cost at the profit maximizing level of output
A monopolist
produces a product with no close substitutes.
When marginal profit turns negative,
producing more output will decrease total profits.
As long as marginal profit is positive,
producing more output will increase total profits.
Allocative Efficiency
producing the optimal quantity of some output; the quantity where the marginal benefit to society of one more unit just equals the marginal cost
In the event that Only1Corp. obtains control of all the natural gas producers in the US, it would most likely
raise prices, cut production, and realize positive economic profits.
. As a consequence, the government allows producers to become
regulated monopolies, to insure that an appropriate amount of these products is provided to consumers.
The result of ________ is that government price regulation can often become a way for existing competitors to work together to reduce output, keep prices high, and limit competition.
regulatory capture
When government price regulations paves a way for competitors to band together to reduce output, keep away competition and keep prices high it is known as ________.
regulatory capture
The horizontal demand curve means that, from the viewpoint of the perfectly competitive firm, it could sell either a
relatively low quantity like Ql or a relatively high quantity like Qh at the market price P.
Deregulation
removing government controls over setting prices and quantities in certain industries
When considering cost and revenue curves for a monopolist, the total cost curve will ________ then ________. The total revenue curve will ________ then ________.
rise, increase rapidly; rise, fall (The total cost curve is upward-sloping. Profits will be highest at the quantity of output where total revenue is most above total cost. the profit-maximizing level of output is the same as the revenue-maximizing level of output, which should make sense, because profits take costs into account and revenues do not. Total revenue for a monopoly first rises, then falls. Low levels of output bring in relatively little total revenue, because the quantity is low. High levels of output bring in relatively less revenue, because the high quantity pushes down the market price.)
City Electric is a natural monopoly that supplies electricity to a medium sized city. The cost and demand information are in the table below. If the government decides to regulate this natural monopoly by forcing them to produce at the point where the demand curve intersects average cost, then compared to the unregulated natural monopoly, the quantity will ________ and the price will ________.
rise; fall
Which of the following is least likely to present a barrier to entry into a market?
scientific cooperation
Monopoly is a
single supplier, the only firm in an industry
while a broadly defined market will tend to make it appear
smaller.
The last thing necessary for price discrimination is the inability for customers to resell the product. If a grocery store charged a higher price for female shoppers and a lower price for male shoppers,
smart females would simply ask their male associates to shop for them.
As a result, one firm is able to supply the total quantity demanded in the market at lower cost than two or more firms—
so splitting up the natural monopoly would raise the average cost of production and force customers to pay more.
Of the following examples, which has the potential to lead to domination in an industry by a monopoly?
sole ownership of a natural resource
Which one of the following is the most accurate description of a monopolist?
sole producer of a product for which good substitutes are lacking in a market with high barriers to entry
The total revenue curve for a monopolist will
start low, rise, and then decline.
Barriers to entry can range from the simple and easily surmountable, .
such as the cost of renting retail space, to the extremely restrictive
What qualities would ideally suit a monopolistic firm with regard to barriers to entry?
sufficient strength to prevent or discourage potential competitors from entering the market
Herfindahl-Hirschman Index (HHI). The HHI, as it is often called, is calculated by
summing the squares of the market share of each firm in the industry.
Thus, consumers will suffer from a monopoly because it will sell a lower quantity in the market, at a higher price,
than would have been the case in a perfectly competitive market.
Even though there are very few true monopolies in existence, we do deal with some of those few every day, often without realizing it:
the U.S. Postal Service, your electric and garbage collection companies are a few examples.
The following figure shows the average cost curve, demand curve, and marginal revenue curve for a monopolist. After maximizing profits, what do the firm's profit's equal?
the area of rectangle BDEG
If an industry is perfectly competitive or monopolistically competitive, then the government has relatively little reason for concern about:
the degree of monopoly power possessed by firms
The figure below shows the demand curve and the long run average cost curve for an electric company. This market is a natural monopoly because
the demand curve intersects the long run average cost curve at a point where the long run average cost curve is downward sloping
As output increases, marginal revenue decreases twice as fast as demand, so that
the horizontal intercept of MR is halfway to the horizontal intercept of demand.
Since a monopolist faces a downward-sloping demand curve,
the only way it can sell more output is by reducing its price.
Four-Firm Concentration Ratio
the percentage of the total sales in the industry that are accounted for by the largest four firms
Market Share
the percentage of total sales in the market
Nearly all monopolies in the U.S. are regulated monopolies, meaning
the prices they charge have to be reviewed and approved (or not) by a regulatory branch of the government.
First, the firm needs to have at least some market power. If it has no market power,
then it can't charge different prices for different customers.
If the marginal revenue exceeds the marginal cost,
then the firm can increase profit by producing one more unit of output.
Rather, it's because they are allocatively inefficient, in other words,
they produce too little of the product, and because (often) they are productively inefficient, that is, they don't produce as cheaply as possible.
Antitrust laws give government the power to block certain mergers, and even in some cases to break up large firms into smaller ones, in order to ________.
to protect consumers from predatory business practices (Antitrust laws are passed to protect consumers from predatory business practices, promote fair competition, and prevent price gouging)
When considering a competition policy for a natural monopoly, the optimal move is ________.
to set the price where AC crosses the demand curve
Which of the following describes the typical shape of the monopolist's total cost curve?
total costs decrease and become flatter as output rises (wrong)
Profits for a monopoly will be highest at the point where
total revenue is most above total cost. (Profit is maximized when the difference between revenue and cost is the largest with revenue higher than cost.)
The total cost curve for a monopolist is
upward sloping
Most legal monopolies are considered
utilities—products necessary for everyday life—that are socially beneficial to have.
This typically happens when fixed costs are large relative to
variable costs.
Natural monopolies often arise in industries where the marginal cost of adding an additional customer is
very low, once the fixed costs of the overall system are in place.
Acquisition
when one firm purchases another
In the economy, allocative efficiency takes place
when the mix of goods and services is at its ideal or optimal.
Price Cap Regulation
when the regulator sets a price that a firm cannot exceed over the next few years
Merger
when two formerly separate firms combine to become a single firm
One is legal monopoly,
where laws prohibit (or severely limit) competition.
As the quantity sold becomes higher, at some point the drop in price is proportionally more than the increase in greater quantity of sales, causing a situation
where more sales bring in less revenue. In other words, marginal revenue is negative.
The other is natural monopoly,
where the barriers to entry are something other than legal prohibition.
Natural monopoly occurs
where the economics of an industry naturally lead to a single firm dominating the industry.
A decreasing cost industry exhibits economies of scale,
where the technology is such that the scale of operation matters, so that the long run average cost of production is lower for a large firm than for a small one.
Mergers can also be lateral,
where two firms of similar sizes combine to become one.
Monopolies have monopoly power,
which is the ability to set the market price
Because the monopolist is the only firm in the market, its demand curve is the same as the market demand curve,
which is, unlike that for a perfectly competitive firm, downward-sloping.
A perfectly competitive firm will also find its profit-maximizing level of output where MR = MC. The key difference with a perfectly competitive firm is that in the case of perfect competition, marginal revenue is equal to price (MR = P),
while for a monopolist, marginal revenue is not equal to the price, because changes in quantity of output affect the price.